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On February 24, 2025, SEBI released a circular to address concerns over the trading of derivatives. It brought to light instances in which big investors were purchasing low-delta options to artificially increase Open Interest (OI) and force companies into the ban period.
New restrictions have been recommended by SEBI to address this issue. Let's examine these new regulations and their implications for investors.
What is going on?
In the past, the derivatives market's Open Interest (OI) was determined using notional value. The consultation paper does, however, recommend altering the way that Open Interest is determined for shares. It is now predicated on the F&O deals' notional value. By using this method, the Market Wide Position Limit (MWPL) rises to 95% more quickly, which results in an earlier F&O restriction on the stock.
Delta-Based OI System: New Regulations
The way OI is computed has been proposed to be changed by SEBI. A delta-weighted approach will now be used to measure it instead of just notional value as it was in the past.
For example, if an OTM call option has a delta of 0.1 and is priced at Rs 100, OI will now only receive Rs 10 rather than Rs 100. This will improve market stability and help avoid fake OI inflation.
Importance of Delta & Impact of the New Rules
The amount that an option's price fluctuates in relation to its underlying stock is measured by its delta.
As an example, the price of an option with a delta of 0.5 will climb by Rs 5 if the stock price increases by Rs 10.
Backtesting of these adjustments by SEBI between July 1, 2024, and September 30, 2024, revealed a notable impact. Under the new approach, there were just 27 occasions where stocks entered the prohibition period, compared to 366 occurrences under the previous regulations, a decrease of more than 90%. In addition to lowering market volatility, this will make manipulating stock prices more challenging.
Monitoring in Real Time to Increase Transparency
Because OI monitoring was only done once a day in the past, some big investors were able to inflate OI during trading hours. Clearing organizations will henceforth track the MWPL utilization (with reference to FutEq) of individual stocks at random intervals for at least four times a day in order to mitigate systematic and settlement risks.
All market players will have access to these readings, enhancing openness and risk management.
Furthermore, it won't be possible for any investor to inflate OI during the day. Investors will also have access to real-time data, which will enable them to swiftly modify their plans.
Pre-open and post-close sessions' advantages
Pre-open and post-close sessions have been extended to the derivatives market by SEBI. This was previously limited to the cash market, but it is now being explored for trading in futures and options as well.
By enhancing price discovery and lowering abrupt volatility during these times, this action seeks to provide investors with more chances to carry out their plans.
New Guidelines to Avoid Manipulation in Indices That Are Not Benchmarks
To make sure that no one stock has undue market power, SEBI has also established new guidelines for sectoral and theme indices.
According to the new rules, an index must have a minimum of 14 equities, and no stock may be more than 20% of the total. Furthermore, the top three stocks cannot have a combined weight of more than 45%. This makes sure that no big business can control an entire index.
What Comes Next?
The deadline for public comments on these suggestions is March 17, 2025, according to SEBI. You can express your opinions on SEBI's official website if you trade derivatives, are worried about market manipulation, or wish for a more stable and transparent market.
The sole objective of this article is to provide information. This isn't advice on investments.
